Mail Bag: How Would You Measure Financial Success?

"If you’re looking for my personal answer, I would consider someone financially successful when they can independently generate enough money to fund the lifestyle they require while retaining control over their time."

This sentiment is truly profound. It is a philosophy that is part of why I enjoy the blog. I normally believe I understand counterpoints very well, but I confess that I do not understand why everyone does not feel this way. Maybe it is like the folks in footnote 1 that dont quite see money as a tool to provide the control of time but rather only as the first part, to get what we want? Alas, my cross to bear is convincing my spouse of this philosophy, as we are in the 1% (barely) but she sees the income stream from trading $ for time as more reliable than a passive income stream. She sees it as safety against a (nearly irrational) fear of becoming homeless. I am starting to fear losing my time more (about 10 years older than you, Joshua) than losing that 4th car.

So, my question is, why (what reasons) for folks out there that dont quite share that view of financial success or know folks that don't, do you think that is and what is the alternative view(s)? I really do want to build my understanding of the alternative points of view here.

Hey Phil...Since I don't know the details of your situation, I would simply ask you this- Do you think woman in general, really care if their husband is able to self-actualize his reality and have time freedom? I would say that for most, the default position is that men are "supposed" to work and that's that, while women have the option to work.

"You see honey, if we just cut our spending by 20% and put it in investments, I could retire much earlier..... "

Of course, if you are a dual income family, then it can be more about shifting to having longer-time horizon thinking. Just ask yourself, what is the incentive to my wife, for following this investment plan?

Never discount the ingrained cultural expectations and the incentives. It can be a lonely road on the path to freedom, and sometimes you just have to force it through. Of course, you could have a totally caring wife who wants to see you achieve freedom and spend more time with her and others - and therefore is willing to make the short-term sacrifices. It's just been my personal experience that a lot of woman don't really give a damn if their husband has to work til he drops.

LOL. Well, we are a dual income family, while it could be true for me it would likely still also have to be true that we simply don't have the same view of what money is for in the first place. Even as a child I only viewed money as a means to freedom. I am having a great time but know we all have limited time, so wasting any of it doing something you don't want to do is not smart. I recall an interview with Warren Buffet once where the interviewer asked him why he still worked and didn't the parts of the job he didn't like make him want to retire. He said something like, well, I really don't do anything I don't want to. I was like bam! yes! now that is what billions do for you 😉 but it doesn't really take billions.

link to chapelle interview

http://m.youtube.com/watch?v=r6RZ41p-42o

I have to agree with David on this one. In my experience many women who are married to successful men have no interest in having them retire early and are not interested in lowering their lifestyle to allow for an early retirement. Maybe I am getting jaded in my older age but it seems more and more men are viewed as a tool to facilitate the lifestyles of their wives and children. There was a time when men were respected for this role and they embraced it. Now we are expected to do it without the respect. I'm saving what I need to ensure that I can retire at a reasonable age. I have seen too many boomer age colleagues who are really struggling by not having financial freedom. Its forcing them to be very entitled and expect others to do the work while they continue to get paid. A sad way to end your career.

I don't think this is anything new. Women are sexually attracted to men who are powerful (physically/financially/socially) and ambitious. Intellectually they want you to be free and happy, but sexually, telling your wife you want to lower your lifestyle and quit working is like her saying, "Honey, I've decided to stop shaving my legs".

Women aren't "wrong" for feeling this way - it's simply the result of thousands of generations of natural selection. At the same time, there's nothing wrong with you wanting something different. I'm just saying, we often don't understand women because we're attracted to completely different things.

Maybe that's the norm, but my wife is MANIC about me retiring early. Anything that keeps me working past 50 is seen as a tragedy to her. Guess I found myself one of the good ones!!!!

David, I'd take a good look at what type of women you associate with if that's your general impression. Most women I've met are hard workers and don't expect a man to pay their way, and would be quite insulted by your last paragraph.

David -- Perhaps that is a stereotype but I doubt it is true in every case. Out of curiosity I asked my wife, "Suppose I end up being talented at investment and decide I just want to quit my job and paint art for the rest of my life?"

She said she would be supportive if it's real and not just some trick like the recent run up of the stock market. Seems reasonable to me, but I don't want to paint art :-).

"Mr Money Mustache" and "Early Retirement Extreme" are blogs where the authors actualized this philosophy at a lower spending level than many thing is needed for happiness, but both authors are now Financially Independent and have total control of their time based on saving and investing almost every penny from their middle-class incomes.

Yes, but they do it by living very frugal lives, riding bikes, buying handy man special houses, drinking oil for calories, etc, Joshua shows you can have you cake and eat it too!

mmmmmm, cake. Yeah, I am actually talking about retiring at pretty much the same "means", just doing it early. It would mean walking from a lot of incremental money because the prime earning years (for me, anyway) are really as you get more experience, responsibility, pay, and incentives. I pretty much am in those years now, but How much incremental $ does a person need. I appreciate the data offered in this blog as it helps me reason through it. I just need to have a rational, numbers based discussion about it with my spouse and she mostly talks about, "what if we live to 95" and I am like, so let's do the math, above a certain amount, live forever, no worries.

You should have that number at the ready. A net worth of 34x annual spending and you'll be good from all but the worst scenarios. Scenarios where it wouldn't matter if you had a job or not. For example, take the high end of the middle class gross monthly income figure above. $4,336 per month x 12 months in a year x34 (representing a 3% annual withdrawal rate) equals $1,768,000 needed to retire.

Haha, yup. It's nice having all of the above as resources. I have to say, I don't like always getting face-punched for buying a new iPhone every few years instead of using the most frugal phone possible.

Some of these responses are funny to me.

I think I'm a frugal and paranoid person by nature, so a lot of these options don't evaluate as happiness to me. For example I don't like phones or cars, so I don't want a new phone or a new car. I'd rather bicycle around a campus that is fenced off from cars, since I find that more peaceful and enjoyable. And I currently have no phone but even when I have one I try to avoid using it, because I don't like being "on call" for people who I may not even want to talk to. I'd rather these interruptions go into a passive queuing system like email that I can check every day or two.

If I was a billionaire I'd buy a car with maximum safety but would still not enjoy driving it. I'd still fly at the back of the aircraft because it's statistically twice as safe. Occasionally for fun I'd fly first class if they serve cookies or alcohol, but generally I wouldn't like the increased danger. Helicopters would be totally out except for helicopter skiing, because skiing is so fun that it would be worth the increased risk! Traveling to exotic locations would be a definite go, but I already do that.

Here's an idea - what if you took the engineer-style efficiency of MMM & ERE, and the historical quasi-law that if you want to be wealthy, you should operate/start/found a business (Joshua oftens talks about this - check out The Richest Man in Town by W. Randall Jones too!).

Running a barebones lifestyle is in this blog too - because you need to do that at the start. Frugality is an essential compenent of building wealth, and let's not forget MMM and ERE are wealthy according to the definition above, and the numerical ballparks.

I remember Joshua talking about Aaron driving a banged-up ford to keep costs down. Is there a great reason to be less happy at this stage of (a) life? No. There's just different sources of pleasure - that 4AM donut really matters to you, buying domain names and setting up servers is exciting as hell, riding your bike down to the gym is a ball too. Apply the MMM principles for happiness wherever you are on the journey, and let compounding do the heavy lifting.

Now if you retain that badassity as your net worth climbs, you end up being able to buy access to incredible experiences and enable great things. You can give that great pianist your kid knows from school an anonymous scholarship, or start propping up your local library with the books that shaped the trajectory of your life.

It's easy to look at a lavish lifestyle from the perspective of MMM/ERE and say "oh my, you're harming the planet, your wallet and your health", but once you get to stratospheric wealth, that private jet is carting an individual around the world has a greater ability to make things happen than most governments. Would you rather Bill Gates sat around waiting in an airport departure lounge over hopping on a jet to meet other powerful people?

When assets start pooling around an individual with good intentions, that can enable a whole world of good. When you get there, the efficiency variables start changing. To avoid the red ring problem, MMM/ERE at the start, driven by an armada of economic engines, churning cash into your accounts. If you're after aggregate contribution to humanity (which is a ballpark adjacent to happiness, but not quite the same one) - this is quite a good tactic. It might be worth reflecting on this next time you see a chauffeured SUV whiz past you and roll up to a waiting private jet! I'll try!

"The most famous study on the topic out of Princeton found that personal happiness topped out at $6,250 pre-tax per month, while another source claims the ideal, theoretical figure for most people to live the way they want is $13,417 per month. Turns out most people just want a nice car, a decent house, a few good clothes, and some spending money in their pocket."

I'm assuming the $6,250-$13,417 figures are all else equal - I think people with stressful jobs they don't like (most of my other fellow law school graduates) may need more than that to feel happy, while those doing a job they absolutely love, or financially independent of working for others, may need far less.

Still working on hard on getting even a fraction of that in passive income (although we're finally scaling out of goal #1 above and scaling the bottom heights of that optimal happiness range). I have to say, getting a dividend check (or seeing per share retained earnings growth) for $100 makes me FAR happier than getting a paycheck from work for $1,000. It's money I got as an owner, rather than a working employee, and that is just so satisfying.

I prefer to call that $100 "money I earned while sitting there with a thumb up my ass." But otherwise, I share your sentiment 🙂

Haha, totally. The fact is that being an owner is a state of being where you don't have to do anything (unlike being an owner-manager in the case where you own a small business and also run it). It's not like work where you have to do a lot to earn every penny. It's nice being the owner.

I currently have a business generating income on the lower end of that middle class scale. This business gives me full control over my time. However, I know I could get a full time job that I would like that pays much better (over 100k). On the one hand I love having control over my time. But I could run this business on the side (with lower growth) and earn a ton working. I could save 80% and build up substantial capital over the next few years and then quit. However by focusing on the business now, maybe I could 10x the earnings and make much more. I'm still quite young and close to graduating college. Any advice?

it just mean that you are not spending enough time working on your business, the time you are going to spend working in another person business, you should be spending looking for new revenue streams, or maximizing current ones. what you really need to do is hire yourself and treat yourself as am employee. trick yourself you are working for some else who is going to hold you more accountable than you are currently holding yourself. I ABSOLUTELY MEAN NO DISRESPECT! I THINK YOUR QUESTION IS A GREAT ONE BUT YOU ARE SLACKING OFF ON YOUR BUSINESS AND DON'T REALIZE IT! I DID IT TOO AND I WAS SHOCK WHEN I JUST FOCUSED MORE AND TRIED TO BE THE BEST IN THE MARKET AT WHAT I DID AND THE RESULTS WERE AMAZING.

Just to clarify, the business is quite new so I haven't been slacking off. In fact I find myself much more productive when working for myself than when I think like an employee accountable to someone else.
However, it does feel very risky having all my income come from one source. With the job I would be making a lot of money for my age (probably about 120k) and I could still work on the business on the weekends. It seems crazy to turn that down, and most people would kill for a job like that.

Joshua has said many times that he prefers not to live off the income from his businesses, instead reinvesting all the profits for more growth. Also he always stresses having multiple sources of income, I got the impression he was making a lot from writing at about.com (50k+) before he started his own business. In one article about restarting from zero Joshua said that he would force himself and Aaron to both get jobs to build up capital. I have about 100k saved.

Joshua what would you do in my situation?

What do you have to say to those who are " keeping up with the Joneses ", Joshua? Curious to know your thoughts on that.

The phrase "keeping up with the Jonses" implies taking on expenses that you can't afford for the sole purpose of impressing those with whom you have social contact. When you have that sort of irrational spending that isn't motivated by a desire for the object itself or the utility it provides - which is a very different thing than, say, a rare pottery collector breaking the bank to acquire a great piece at Sotheby's or a fashion lover who truly has her heart stolen by Oscar de la Renta's cherry blossom print radzmir dress - something else is happening. It's important to identify what it is.

For some people, it's a matter of winning, like a competitive sport, and there is no malice or bad intention there at all. For others, it's a matter of seeking external validation that they are good enough, or smart enough, or hard working enough. For still others, it's a rebellion against mortality; building something for children and grandchildren that will last beyond the grave, while providing a physical, tangible proof that they were on the path. For some, it's a band-aid for insecurity; a sort of Hermes-emblazoned armor that insulates from criticism and judgment. For some, it provides a sense of belonging, hoping it makes them part of the "in" crowd. For a few, it's a "click-whirl" response where they are emulating what their parents did without thinking about it.

Whenever you take an action, it's a good habit to ask yourself, "1. Why am I doing this? 2. Is this going to achieve what I want it to achieve? 3. Is this the most efficient and enjoyable away to go about doing it? 4. Am I willing to give up the opportunity cost?" Running through those four questions would result in a lot more happy people in the world because what you truly want would always win out over what you want right now.

Speaking from experience and the experience of others, I do believe starting a small business is hard work. Lots of things to keep up on, it gets messy as time goes. Marketing materials and business software that supports management, accounting and other relevant tasks will help you in due course.

Speaking from experience and the experience of others, I do believe starting a small business is hard work. Lots of things to keep up on, it gets messy as time goes. Marketing materials and business software that supports management, accounting and other relevant tasks will help you in due course.

As someone in my 20's in the lower end of 6 figures, I can say not many of my peers care about more money, but they all desperately wish they could control their time. Ownership of how/where you spend your days is worth 10x a salary.

Joshua, great article as usual. I totally agree but for the debt portion of your comment "If you make it to this point and you don’t have a debt-free balance sheet with at least seven or eight figures by retirement, it was because you didn’t know what you were doing."

I'm all about using someone else's money to help fund my investments. Even if I had the cash to outright buy a million-dollar house, I would much rather have the biggest mortgage I could and invest the remaining funds instead. Someone who locked in an after tax mortgage rate even at the high end of 4-5% and invested for 30 years would be significantly ahead of someone who had no debt for the same period. Why would individuals be any different than corporations in this regard? Leverage is required to achieve maximum growth.

Of course this takes discipline and acceptance of risk but I don't think the results can be questioned.

Tell me, how did companies like facebook, Zillow, LinkedIn, etc. manage to grow so rapidly without using leverage, then? None of those companies have a single dollar of long-term debt on their balance sheets.

But this is really about risk. What marginal gain are you expecting in exchange for the marginal risk? If you are worth $10 million, would you accept the risk of bankruptcy in an effort to double your net worth? If so, why? Why accept the risk of losing everything if you don't have to?

Very good points. Tech companies are extraordinary though. Most tech businesses are so cyclical and dependent on a continued string of new product releases that no financial institution on the planet would ever lend them term debt at a low cost of capital. Tech companies would certainly access debt markets if they were able to at reasonable rates. But their only real option is much higher cost public and/or private equity.

If someone invests $10 million in the DJIA over a period of 30 years, their risk of going bankrupt is essentially zero. If they did go bankrupt, it means essentially that everyone on the planet went bankrupt. The world has ended.

So in the end if a person or company can use leverage to generate an extra few percentage points of return it can make a massive difference over a long period.

In my experience, in the upper echelons of the 1%, financial success is often defined as having more than the other guy. At that level, money starts to become a way to keep score.

"I would consider someone financially successful when they can independently generate enough money to fund the lifestyle they require while retaining control over their time ."

To your succient definition I would add that last phrase. I think it's important to build an asset base that is robust and will carry you through life's financial uncertainties.

I am thankful to be paid for something that I already find intrinsically enjoyable.

Therefore my financial success is measured by a "double barreled strategy" of:
(1) Career and purpose -- Being able to do something I deeply enjoy, that I can be paid for if I want;
(2) Flexibility -- If I find I no longer enjoy such work in the future, then I can do nothing, or something else, without decreased happiness.

I currently have (1) but not (2) thus my financial goals are to achieve (1) and (2).

I think a lot of people err by making a goal of only retiring, i.e. the scenario of only achieving goal (2) where you do nothing. This is a huge mistake because people are social creatures, and so the vast majority of people won't be happy doing nothing, or activities without any clear purpose. Also if you somehow make a mistake and run out of money, under the double-barreled strategy you can go back to doing (1) and (2). But I know some children of wealthy people, where if this happens to them, due to lack of personal development, they will be screwed.

For this reason I generally suggest people find a career in the intersection of what is their passion and has good economics. This immediately gives you goal (1) "career and purpose" and then you can build up to goal (2) "flexibility" over time.

My absolute income levels aren't so important as just being able to have an upper-middle class lifestyle while achieving my goals above. Actually because I am in currently in academia I could take a higher-paying job in industry, which would accomplish (2) faster at the cost of sacrificing (1). But my goal is to accomplish both of these goals, so I would not switch strategies unless I find a job in industry that accomplishes goal (1).

Another problem with only picking goal (2) "flexibility" is let's say you manage to land a "dream job" as a CEO that pays you a lot of money, which quickly promises to achieve goal (2). But this creates a lot of stress and you are accountable to all sorts of very difficult people: shareholders, employees, the board, suppliers, competitors, midnight phone callers, etc. Consequently you might not enjoy your very stressful job (and therefore lack (1)), and thus you might go all out to make as much money to retire as soon as possible. Then having retired, you might wish to finally have (1), but could find that is in some totally different direction, e.g. spiritual fulfillment, the personal development industry, mentoring, or whatever else. In my opinion that's just a riskier route because there is a higher probability of not accomplishing one's true goals, due to overweighting the near-term goal of only accomplishing financial flexibility.